a) Mark has a government of Canada bond that has a par value of $30 000 and a co

Question

a) Mark has a government of Canada bond that has a par value of $30 000 and a coupon rate of 6%, payable semi-annually. the bond has 15 years to maturity. Mark needs to sell the bond, and new bonds are currently carrying coupon rates of 8%, payable semi-annually. at what price could Mark sell the bond ?

b)What if mark’s government of Canada bond had a coupon rate of 9%, payable semi-annually and new bonds still had interest rates of 8%, payable semi annually. what price could mark sell the bond for in this situation ?

Explanation / Answer

PV of both the inflows are 775 to find out value of one bond= $60(PVIF, 8%,30)+ $1000(PVIF, 8%,30) By Solving this Value of one bond=775 Value of 30 bonds=775*30              23,250 Working Note He will $60 semi annually 8.00% 1 60 0.925926 55.55556 2 60 0.857339 51.44033 3 60 0.793832 47.62993 4 60 0.73503 44.10179 5 60 0.680583 40.83499 6 60 0.63017 37.81018 7 60 0.58349 35.00942 8 60 0.540269 32.41613 9 60 0.500249 30.01494 10 60 0.463193 27.79161 11 60 0.428883 25.73297 12 60 0.397114 23.82683 13 60 0.367698 22.06188 14 60 0.340461 20.42766 15 60 0.315242 18.9145 16 60 0.29189 17.51343 17 60 0.270269 16.21614 18 60 0.250249 15.01494 19 60 0.231712 13.90272 20 60 0.214548 12.87289 21 60 0.198656 11.91934 22 60 0.183941 11.03643 23 60 0.170315 10.21892 24 60 0.157699 9.46196 25 60 0.146018 8.761074 26 60 0.135202 8.112106 27 60 0.125187 7.511209 28 60 0.115914 6.954823 29 60 0.107328 6.439651 29 1060 0.099377 105.34 774.8443 b. If govt bond are 9% than we will take 9% instead of 8% to find the P/V PV of both the inflows are 691.79 to find out value of one bond= $60(PVIF, 9%,30)+ $1000(PVIF, 9%,30) By Solving this Value of one bond=691.79 Value of 30 bonds=691.79*30              20,754 Working Note He will $60 semi annually 9.00% 1 60 0.917431 55.04587 2 60 0.84168 50.5008 3 60 0.772183 46.33101 4 60 0.708425 42.50551 5 60 0.649931 38.99588 6 60 0.596267 35.77604 7 60 0.547034 32.82205 8 60 0.501866 30.11198 9 60 0.460428 27.62567 10 60 0.422411 25.34465 11 60 0.387533 23.25197 12 60 0.355535 21.33208 13 60 0.326179 19.57072 14 60 0.299246 17.95479 15 60 0.274538 16.47228 16 60 0.25187 15.11219 17 60 0.231073 13.86439 18 60 0.211994 12.71962 19 60 0.19449 11.66938 20 60 0.178431 10.70585 21 60 0.163698 9.821884 22 60 0.150182 9.010903 23 60 0.137781 8.266883 24 60 0.126405 7.584296 25 60 0.115968 6.95807 26 60 0.106393 6.383551 27 60 0.097608 5.856468 28 60 0.089548 5.372907 29 60 0.082155 4.929272 29 1060 0.075371 79.8934 691.7904

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